Despite the market's enthusiasm for a rate cut, the Reserve Bank of Australia (RBA) is unlikely to cut interest rates when it meets today.
Since late last week, the market has pushed up the odds of a rate cut following an article by prominent economic commentator, Terry McCrann. Once known as 'Shadow Governor', Mr McCrann gained the nickname following his ability to accurately pick the interest rates moves by the RBA – although that might have had more to do with his connections with senior RBA executives.
In his article, Mr McCrann outlined why he thought the RBA had no choice but to cut the official cash rate, but he also noted that it was possible the RBA would leave rates on hold too.
The market has jumped on that article and run with it, building in expectations of a rate cut later today.
Unfortunately for the market, its guess is likely to be proved wrong, with the RBA more likely to keep rates on hold this month. That's not to say the central bank won't cut rates this year – just that it's not going to be today.
Today, a group of leading monetary policy experts, dubbed the 'shadow board', argued that the RBA and governor Glenn Stevens should keep rates on hold. The shadow board sees a 68% probability of rates being left on hold, given the 8% fall in the Aussie dollar against the US dollar and the 60% fall in oil prices.
Falling oil prices puts more dollars in consumers' pockets while the slide in the Aussie dollar helps out our exporters.
With core inflation numbers still between the RBA's target band of between 2% and 3%, the RBA can hold fire on interest rates for now, giving them additional firepower should they need it later on.
As Dr Mark Crosby, University of New South Wales economist told the Australian Financial Review,
"International developments remain highly uncertain. With underlying inflation in the desired range, waiting would seem to be a better approach than using up ammunition given fragility in the global economy."
But while the market might be disappointed later today, it may get its wish next month – we'll have to wait to see the language in the RBA's minutes released at 2.30pm with the rates decision.
For investors, the decision is irrelevant as Motley Fool Australia General Manager Bruce Jackson pointed out yesterday.
